The Daily Update - The elephant in the data - The ranging benefits of globalisation across income brackets

Back in 2012 Branko Milanovic from The World Bank published a well regarded paper on global income inequality along with its comprehensive datasets. Of particular popularity was a line chart of how globalisation has benefited those of differing wealth and incomes over 20 years (1988-2008), in what has now come to be known as the ‘Elephant Chart’ due to its shape. (A broad arch between the 15th and 65th percentiles representing the main body of globalisation’s benefit, but tailing off for the poorest decile - who remain mostly outside the advances and benefits of global market integration, as well as trunking down to zero around the 75th to 85th percentiles and then exponentially back up again for those at the very top).

It is well known that extreme poverty has been halved in the past two decades with real incomes across the poorest two-thirds of global population broadly rising by 40% to 80%. But meanwhile, those in the upper third (excluding those at the very top) have ostensibly seen their real incomes stagnate. Whilst few would lambast the reduction in poverty, many who once felt more of the benefit of residing in a richer country perpetually face the bitter recognition that those behind them are catching up and those ahead of them are pulling ever further away. It makes plain the inevitability of growing anger across low and middle income households in the developed world. The bitter effects of globalisation have been tolerated for decades but are now being discarded as ‘snake oil’ fuelling support for hardliner politics and protectionist agendas.

Following the Brexit vote and the popularity of figures like Mr Trump across the world this pithy ‘Elephant Chart’ is again driving popular discussion and papers on how discontent over real incomes is perhaps the driving force behind such unrest.  But notably yesterday’s report from Adam Corlett of the Resolution Foundation examines Milanovic’s data and finds that making sensible fixes to the data before such comparisons (i.e. separating outliers like Japan and ex-Soviet states during this period and accounting for differing population growth) goes some way to debunk the above simplified argument. Using the example of the UK it shows that there was still a reasonable benefit for low and middle income households but just that this has been vastly overshadowed by the combined population and wealth acceleration in countries like China and India. Also other factors such as rising house prices (also perhaps due to globalisation) can be shown to disproportionately detracted from the living standards of low and middle income households.

Amongst the gilded technical insights from both papers a few relevant conclusions may be drawn. First, that isolating a developed country from the faster growth and opportunity elsewhere will be more damaging than remaining part of a globalised framework. Second that income stagnation is not inevitable for those naturally hardest hit by globalisation. Moreover that domestic government policies addressing wages, housing and taxes will do more to dampen this inequality than trade policy alone. Allowing blame to be focused on the partialities of globalisation detracts the necessary pressure for driving overdue domestic reforms that would have already boosted the living standards of the disfranchised masses. The decision for leaders now is how to appease the drifting unhappy suffrage and gain back support and trust: whether to admit more should have been done domestically, or to continue to pass the blame and perhaps being forced further into stunting isolationist policies. With rising dissatisfaction and forthcoming elections it looks likely that something has got to give eventually.

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